Target: ₹3,3,925
CMP: ₹3,496.55
We had highlighted in our earlier report that the news flow on tariffs is not constructive for earnings upgrade and decision-making, and that the first-order impact could be trimming of P/E multiples followed by a second-order impact of potential earnings downgrade. The Nifty IT Index has underperformed Nifty Index by about 7 per cent YTD and around 1 per cent since February 2.
In this backdrop, we review and trim our earnings estimates of Tata Consultancy Services (TCS) to account for a potential slower global growth, change in the clients’ IT spending pattern due to the impact of tariffs, and pass-back of productivity gains led by infusion of artificial intelligence (AI).
We adjust our estimates modestly and now expect FY25F-27F US$ revenue CAGR of 4.5 per cent (vs. 7.5 per cent earlier) and PAT (₹) CAGR of 9.2 per cent (vs.11 per cent). We retain our target PE/G multiple of 2.6x to arrive at our target P/E of 24x (28x) FY27F EPS to arrive at a lower target price of ₹3,925 (₹4,915 earlier).
Operating cash flow and dividend payout ratio certainty, and healthy return ratios help retain the target PE/G multiple. Slower recovery in the North America (NA) geography and the FSI vertical, weak bookings in 1HCY25F and higher project cancellations are key downside risks to our growth assumption and target price.
